Finite risk, an innovative form of reinsurance, is becoming a popular choice for many companies that face risks traditional insurance policies don’t address, said David Mendelsohn, partner and chairman of insurance and reinsurance transaction for DLA Piper Rudnick Gray Cary U.S. LLP. He called the product “a customized solution that gives companies the benefits they’re looking for, which may be accounting benefits or risk transfer benefits. They’re perfectly legitimate. There’s nothing illegal about this kind of transaction.” Mendelsohn was among panelists at “The Convergence of Spitzer, the SEC, and the Insurance Industry: Transparency, Disclosure, and the Future of Structured Risk Products,” hosted by the Global Finance Roundtable at Gleacher Center September 8.
From recent intense government scrutiny and prosecution, Mendelsohn said, companies can learn several lessons; most importantly, they must demand transparency in their finite risk transactions. “You can’t be complacent,” Mendelsohn warned. “The herd mentality is no defense. It’s no defense in the law to do what your competitors are doing and justify what you’re doing just because competitors are doing it.” In his prosecutions, New York Attorney General Eliot Spitzer hated hearing that argument from investment banks, Mendelsohn said. “That really rubbed him the wrong way.”
Aon Corporation settled Spitzer’s complaint on March 4, creating a $190 million fund for distribution to its clients and implementing reforms in the next 60 days. Robert Rivkin, Aon’s vice president and deputy general counsel of litigation and government affairs, said, “It’s caused changes in our processes for disclosure of and consent to our remuneration, and for communicating Aon’s interest either as an investor or as a corporate affiliate of anybody else who might be making money related to a client’s placement.” He added, “My personal opinion is that this is a good thing for the industry. In the end, a service industry like ours relies on client trust, which is closely correlated with the sense that you’re getting full disclosure. I think, frankly, we’re going to do well in what sometimes gets referred to as the ‘new world’ of transparency.”